The rule of N
Roger Partridge writes:
In New Zealand economics, numbers have personalities. Two supermarkets are a duopoly. Three would be perfection – except four banks are still an oligopoly. One airline is intolerable, even though two always seem to collapse.
The equation is precise: current number (N) plus one equals salvation. This is the Rule of N – count the competitors, declare the number insufficient, and pronounce the market broken. It is beautifully simple, and completely backwards.
No one ever asks why three supermarkets would be perfect when four banks remain inadequate. Or if four gentailers are too few, why are three telcos enough? The Rule of N never explains why the magic number varies by industry, or why it always happens to be exactly one more than we currently have. Perhaps the mathematics of competition is more mysterious than advertised.
Roger has a good point here. We do tend to always think one more competitor is the magic solution.
There is an interesting rule or observation from BCG that “A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest.”
Recent signals from the government suggest this mystical thinking may be fading. Politicians are slowly learning to get out of their own way. Ministers are discovering that if they want to attract a supermarket chain, removing the barriers they created – zoning mazes and planning consents that drag on for decades – is more useful than bashing incumbents.
A Parliamentary inquiry has gently suggested banking regulators might be guilty of keeping competitors at bay with requirements that would intimidate the bravest new bank. The revelation is dawning: competition comes from opening gates, not counting players.
In my mind there are different challenges for industries where a physical presence is needed. When choosing a telco or broadband provider, you don’t care much about where it is located. I have Sky as my broadband provider and I have no idea if they even have an office in Wellington.
But with supermarkets and petrol stations, location is huge. Few people will drive to another suburb just because a supermarket there is a bit cheaper this week. Likewise you don’t drive around a suburb looking for the cheapest petrol – you often go to the closest one. So the key to better competition in these industries is not more companies, but making it easier for them to establish new stores or stations.